by James Dunlap
Did you know that a claim of Unsuitability could be filed if your stock broker over-concentrates high-risk and speculative securities in your account. This broker liability for over-concentration arises even in the face of a stock broker claim that the client recognized the risk.
In two cases reviewed by the SEC, it was held that even if the client is aware of the risks, the broker was liable for over-concentration. Here is a synopsis on the rulings.
“[The broker] admits that [the clients] were investing in a manner that was not suitable for them; however, he contends that they were aware of the risks and it would have been wrong for him to refuse their orders merely because he felt that the investments were not suitable, the concentration of so much of the customers’ equity in particular securities “increased the risk of loss … beyond what is consistent with the objective of safe non-speculative investing.”‘
‘Even if we were to accept [the broker’s] view that these clients wanted to speculate and were aware of the risks-a conclusion not supported on this record-the Commission has held on many occasions that the test is not whether [the clients] considered the transactions in their account suitable, but whether [the broker] “fulfilled the obligation he assumed when he undertook to counsel [them], of making only such recommendations as would be consistent with [their] financial situation and needs.”
For years, NASD and NYSE have routinely fined and sanctioned stock brokers for over-concentrating their clients’ accounts in as little as 20% in a single industry or security. In this case the concentration exceeded 70%.
Importantly, the SEC and FINRA, (Financial Industry Regulatory Authority formed in 2007, with the merge of the NASD and the New York Stock Exchange’s regulation committee) almost universally measure concentration as a percentage of the investor’s account, not some after-the-fact denominator fashioned by a brokerage firms lawyers once the damage has been done.
To learn more about James Dunlap, visit him at www.jamesdunlaplaw.com.
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